INSIDE WASHINGTON/A logical deduction
Local leaders are working to scuttle a presidential appointed panel’s proposal that would eliminate the federal tax deduction for state and local taxes. The officials warn that the move would shift the financial burden to states and localities and decrease revenues for local services.
The proposal, part of a broader effort to reform the current federal tax code, is one of many recommendations recently made by the nine-member President’s Advisory Panel on Federal Tax Reform. While intended to simplify the current code, many local leaders say the recommendation to eliminate the state and local deduction would result in millions of Americans essentially being taxed twice. And that would “punt the costs to the state and local governments,” says Clarksburg, W.Va., Councilmember James Hunt.
The panel presented its suggestions last month to Treasury Secretary John Snow, who will review the proposals and decide which ones to formally recommend to President Bush. The president would need Congress’ approval on any changes to the tax code, which some officials say might be difficult for the Bush administration during a midterm election year.
But local leaders still are worried and are laying the groundwork now to keep the deduction for local and state taxes intact. “Our efforts basically will be to educate and inform,” says Hunt, who also serves as the first vice president for the Washington-based National League of Cities (NLC). “We’re going to monitor this, and if it’s proposed in the form of legislation, we’ll garner our support against it.”
Bart Peterson, Indianapolis Mayor and NLC’s second vice president, says that by eliminating federal tax credits for certain state and local taxes, such as property, residents would pay taxes twice — first on their incomes, their properties and on goods purchased in their communities, and then again on their federal tax return.
Local leaders say they are worried the elimination will be seen as a tax increase by taxpayers, who will pressure local governments to lower their local taxes to offset the higher federally mandated tax increases. “This could lead to a dramatic reduction in the options that cities have to raise revenue to fund schools, local transportation projects and first responders,” Peterson says.
Larry Jones, assistant executive director for urban economic policy for the Washington-based U.S. Conference of Mayors, says that the proposal could negatively affect the housing industry, which he contends has helped to drive economic growth for localities over the past few decades. For most cities, revenue from property taxes is the biggest source of revenue for local services, Jones says.
Taking away the property tax deduction will make home ownership nearly impossible for many people, Jones warns. About 70 percent of Americans currently own homes. “To eliminate the deduction would stymie or reduce the [homebuying] trend we’ve seen over the last few years,” he says.
Hunt says that many people think the proposal is unfair, and he expects that local leaders will find plenty of allies if it reaches the president. “We don’t want middle-class Americans, who are itemizing and paying these taxes, to be taxed again,” he says.
The author is Washington correspondent for American City & County.